PepsiCo's earnings rise on growth of 'healthy' snacks

BLOOMBERG

PepsiCo Inc, the world's No. 2 soft-drink maker, said second-quarter earnings climbed 15 percent after sales were boosted by Gatorade and the introduction of a lower-fat line of Lay's potato chips and Cheetos cheese puffs.

Net income rose to US$1.01 billion, or US$0.58 a share, from US$875 million, or US$0.48, a year earlier. Sales increased 6.8 percent to US$6.54 billion, the biggest gain in more than a year, Purchase, New York-based PepsiCo said in a statement.

Frito-Lay sales rose 6 percent in North America after the company in May started selling its Natural line of snacks, which are cooked in fat-free oils and include more organic ingredients.

The unit accounts for about 60 percent of PepsiCo's sales. Chief executive Steven Reinemund has sought to counter lackluster soda demand by selling new products to health-conscious consumers.

"Frito-Lay continues to be a growth engine," said analyst Daniel Peris of Federated Investors, which owns about 1 million PepsiCo shares. "They are coming out with innovative products, with a shift toward better-for-you products."

Beverage sales in North America rose 7 percent, more than analysts' forecasts, because of demand for Gatorade sports drinks and Aquafina water.

Shares of PepsiCo rose US$2.40, or 5.4 percent, to US$46.95 at 4:01pm in New York Stock Exchange composite trading. The stock had risen 5.5 percent this year.

Second-quarter profit matched the average estimate of analysts surveyed by Thomson Financial. PepsiCo reiterated it expects to earn US$2.16 to US$2.19 a share this year, with earnings growth stronger in the final quarter.

Frito-Lay announced in September it would begin using corn oil to make Doritos, Tostitos and Cheetos snack foods as more consumers seek to eliminate fatty acids from their diets.

The US Food and Drug Administration said yesterday that food companies will be required to include details about trans-fatty acids on product labels by 2006.

About one third of Frito-Lay revenue gain came from higher prices of its healthier items, which are increasing in sales at a faster pace than the rest of its business, company officials said on a conference call.

"Innovation is allowing them to have above-trend growth at Frito-Lay," said Pete Schofield, an analyst at John Hancock Sovereign Asset Management, whose US$1.3 billion in assets includes PepsiCo shares. "They continue to execute and produce on that front. It was a very solid quarter in a tough environment."

Both the food and drink businesses contributed to a 10 percent increase in international revenue, led by higher snacks sales in the UK and Asia.

Beverage sales rose even as rainy weather in the Northeast hurt demand for carbonated drinks like Pepsi. The volume of non-carbonated beverages sold in North America increased 8 percent, while its main carbonated drinks rose at less than half that rate, led by Mountain Dew and Diet Pepsi.

PepsiCo will introduce a vanilla-flavored cola this quarter to try to boost sales of its lagging cola business.

Costs related to PepsiCo's acquisition of Quaker Oats Co dropped 83 percent to US$11 million in the quarter. That added about 5 percentage points to the earnings growth.

Pepsi Bottling Group Inc, the largest distributor of PepsiCo's beverages, reported earlier this week that profit last quarter dropped 5.8 percent as volume fell 2 percent.